Foreign Investment Flows into Central and Eastern European Countries Make Major Gains Latvian Shipping Co. Leads New List of the Top 25 Transnational Corporations in Central Europe

TAD/INF/PR/992522 September 1999

Foreign direct investment (FDI)(1) by transnational corporations (TNCs)(2) into Central and Eastern Europe in 1998 were heavily concentrated in Poland, the Czech Republic, Romania, Hungary, and the Russian Federation. However, while most Central and Eastern European countries saw major gains, inflows to the Russian Federation plummeted last year by 65 per cent.

With new FDI inflows of US$19.4 billion, the inward stock of FDI in the region reached US$90 billion in 1998 and it is likely to exceed US$100 billion this year, according to World Investment Report 1999: Foreign Direct Investment and the Challenge of Development (3) published today by the United Nations Conference on Trade and Development (UNCTAD).

According to UNCTAD, much of Central and Eastern Europe is catching up with the rest of the world in terms of the region’s ability to attract foreign direct investment, as shown by FDI growth rates in the 1993-1997 period. FDI flows into the region rose by 28 per cent a year, compared to an annual average inflow growth rate of 23 per cent for developing countries and 16 per cent for developed countries during this period. The report adds: "This catching up may be even faster than data suggest because inflows into the region are often under-reported."

Inflows to the Russian Federation, by contrast, went against the trend in 1998. These collapsed from US$6.2 billion in 1997 to US$2.2 billion, pushing the country into third place in the region as an FDI recipient, below Poland - by far the leader - and the Czech Republic.

WIR99 notes that among the reasons for the sharp decline in FDI flows to the Russian Federation was the impact of last year’s crisis on investor confidence and the depreciation of the ruble (a 71 per cent decline in the exchange rate in 1998), which reduced asset values and revenues in dollar - or other hard currency - terms.

Another explanation is that, based on 1998 stock, less than 16 per cent of inward FDI is "efficiency-seeking", which usually includes investment that generates exports and would have benefited from the ruble depreciation. Foreign investors have been attracted instead to the country’s natural resources and large domestic market, showing a preference for services, food production, basic metallurgy, and the mining sector.

However, various factors could mitigate the negative impact of the Russian financial crisis in FDI flows to the Russian Federation. These include: further privatization, FDI liberalization in services and natural resources industries, and expanded opportunities for small and medium-sized foreign investors to acquire Russian assets at low prices. Based on a survey by the American Chamber of Commerce, the report notes that while the crisis led to the suspension of investment plans and a reduction in the workforce of foreign affiliates, only a small number of foreign investors have decided to leave the Russian Federation altogether.

In Poland, the growth of FDI was relatively moderate (five per cent); however, FDI commitments to this country, increasing by more than 50 per cent in 1998, indicate that the upward trend may be maintained in the near future.

In spite of negative GDP growth, the Czech Republic and Romania saw a significant increase of FDI inflows. The reasons were privatization programmes, some of which included large companies and banks, particularly in Romania.

Hungary, which registered a slight decline in FDI inflows in 1998, has been experiencing a smooth transition from privatization-led to post-privatization FDI; in 1998, non-privatization investment accounted for 94 per cent of FDI inflows, compared to 34 per cent in 1995. In seven other Central and Eastern European countries (Croatia, Estonia, Lithuania, TFYR Macedonia, Republic of Moldova, Slovakia, Ukraine), FDI inflows also increased in 1998, in some cases by substantial amounts.

The inward stock of FDI into the region is dominated by investors from the European Union, accounting for two-thirds of the total. United States investors accounted for 15 per cent.

Outward FDI flows from the region fell from US$3.4 billion in 1997 to US$2 billion in 1998; of this, the Russian Federation alone accounted for US$1 billion. Poland’s outflow rose US$45 million to US$163 million while modest increases were seen for the Czech Republic and Hungary.

Top Central European TNCs

For the first time the World Investment Report publishes a list of the top 25 non-financial TNCs headquartered in Central Europe, ranked on the basis of foreign assets. (As only one company from the Russian Federation responded to the survey conducted by UNCTAD in May-June 1999, the list does not include any Russian TNCs).

Based on this survey, the top position was taken by Latvian Shipping Company, ahead of Croatia’s Podravka Group and Slovenia’s Gorenje Group (table 2).

Central European TNCs are still in their infancy as WIR99 makes clear. Only the Central European leader, Latvian Shipping Company, would have made the ranks of the top 50 TNCs from developing countries. The "newcomer" status is illustrated by the much smaller size of the foreign assets of the TNCs from Central Europe (the median of their foreign assets was just US$52 million in 1998, compared to a median for the top 50 from developing countries of US$1.3 billion).

The total foreign assets of the leading 25 Central European TNCs reached US$2.3 billion last year, and their foreign sales gained 10 per cent to US$3.7 billion. TNCs engaged in transportation, chemicals and pharmaceuticals, and in mining and petroleum were the most important on the new list.

Endnotes

1. Foreign direct investment is defined as an investment involving management control of a resident entity in one economy by an enterprise resident in another economy. FDI involves a long-term relationship reflecting an investor’s lasting interest in a foreign entity.

2. Transnational corporations comprise parent enterprises and their foreign affiliates: a parent enterprise is defined as one that controls assets of another entity or entities in a country or countries other than its home country, usually by owning a capital stake. An equity capital stake of at least 10 per cent is normally considered as a threshold for the control of assets in this context.